Why Texas Roadhouse is Sizzling Right Now

Texas Roadhouse’s first-quarter performance surprised financial pundits. There was no such effect Monday as the brand’s second-quarter financials lined up with Wall Street expectations. That fact, however, was far from a negative one.

Total revenue climbed 11 percent to $566.3 million in the second quarter. Net income grew 12 percent to $37.6 million (earnings per share of 53 cents), and comparable same-store sales accelerated 4 percent at company-owned restaurants and 3.6 percent at domestic franchise stores.

Similar to the first-quarter review, Scott Colosi, Texas Roadhouse’s president and chief financial officer, broke down the results in straightforward terms.

"We encourage all of our competitors to do as much delivery as they can so they can deliver lukewarm food to their people that order it, and we will stick with our guns on this." — Kent Taylor, Texas Roadhouse CEO

“We're just doing the same things that we've talked about for many years now, which is just focusing on the basics,” Colosi said in a conference call. “That’s what we do. When I say the basics, it is staffing, it is the food, it is the service model, pricing, local store marketing … we just try to get stronger at everything. We don't try to cheapen anything.”

CEO Kent Taylor also didn’t mince words when asked about the hot-button topic of delivery—a target for many casual dining companies—and why Texas Roadhouse continues to resist the space.

“We encourage all of our competitors to do as much delivery as they can so they can deliver lukewarm food to their people that order it, and we will stick with our guns on this,” Taylor said in the call.

Texas Roadhouse’s first-quarter comp sales rose 3.1 percent and 3.8 percent at company-owned and franchised locations, respectively. The fact company-operated sales grew at a quicker pace in the second quarter was a positive note given its direct effect on Texas Roadhouse’s bottom line. Stock jumped 7 percent in after-hours trading.

“Overall, we feel very good about the underlying momentum in our business, which is a testament to the strength of our operators who continue to work hard every day to attract new guests and to build guest loyalty in their restaurants,” Colosi said.

Texas Roadhouse's growth progressed with seven new company-owned stores, including two Bubba’s 33 restaurants. The company, which operates 535 Texas Roadhouse stores and 18 Bubba’s 33 (all company-owned) did lower its outlook for expansion from 30 new locations in 2017 to 27—29. Bubba’s 33 was trimmed from six to four.

Colosi credited some of this to construction issues and said “it is possible that a few of our late December Texas Roadhouse openings may also shift into the next year.”

However, the company was “well underway in building a strong pipeline of new restaurants for 2018 and 2019. Our continued focus on consistent execution, providing everyday value to our guests and keeping it simple, is a huge part of our success,” he said.

Texas Roadhouse expects comp sales to remain in the green for 2017. They’ve surged over the last few months. From April to June, sales grew 2.6 percent, 3.7 percent, and 5.1 percent, respectively.

A slight hit in margin figures, which dropped around a quarter percentage point to just below 19 percent, detracted from some of the momentum. Wage-rate inflation outpaced the benefit of lower food costs and rental costs also increased.

“While restaurant margins continue to be significantly impacted by labor inflation, strong sales and commodity deflation helped offset the impact,” Colosi said. “This led to a 1 percent increase in restaurant margin dollars per store week for the quarter and a 1.3 percent increase in restaurant margin dollars per store week for the year-to-date period.”

In the second quarter, the chain rolled out new menus with a 0.5 percent price increase and added calorie counts, as well as smaller-portion entrée items.

The 5-ounce salmon and 8-ounce New York Strip, Colosi said, are selling well and helping Texas Roadhouse “stay relevant from a price competitive standpoint for years to come.”

Increased traffic is another sign of optimism for Texas Roadhouse. Traffic grew 3.1 percent along with a 0.9 percent increase in average check. Average unit volume was also up 3.3 percent.

Texas Roadhouse’s mobile app is now in just over 200 locations. It allows guests to get on the call-ahead list, order to-go meals, and pay their bill. Colosi said he believes the platform will be available nationwide by the first quarter of next year.

The company doesn’t advertise to-go service, he said, and, as mentioned earlier, is not onboard with delivery.

“I think at the end of the day, we believe we're very much a hospitality-driven company. And so we much prefer you to come in and dine with us and get that hospitality,” he said. “… [It’s] easy for a restaurant company that’s underutilizing its kitchens and just have a lot of negative traffic for the last five to 10 years to want to add delivery. We're just in a different position.”